Canada: U.S. Tax Reform Update: Border-Adjusted Tax

"This is a theory wrapped in speculation inside a guess. Nobody knows for sure what will happen."

– U.S. Senator Tom Cotton (Republican – Arkansas), describing the border-adjusted tax

Republican lawmakers, having gained control of the U.S. Congress, are eager to reduce the U.S. federal corporate income tax rate. One of the most-discussed proposals to pay for this reduction is a "border-adjusted tax" (BAT), also referred to as a "destination-based cash flow tax."

How much revenue is expected? In theory, the BAT should generate additional revenue equal to the U.S. trade deficit, multiplied by the corporate income tax rate. If the U.S. trade deficit is $500 billion, and the corporate income tax rate is 20% (reduced from the current 35%), then the additional revenue generated by the BAT would be $100 billion annually.

The BAT favors U.S. exporters. Under the BAT, U.S. exporters would be exempt from tax on sales of goods and services to non-U.S. purchasers and could deduct their costs, including the cost of labor. But U.S. importers would be subject to tax on gross sales of non-U.S. goods and services.

For example, suppose that a U.S. retailer purchases widgets manufactured in Canada for $50 million, then sells the widgets to U.S. consumers for $100 million. For simplicity, assume the future U.S. business income tax rate is 20%.

Ordinarily, the tax owed by the U.S. retailer would be $10 million (20% of the $50 million profit). The after-tax profit would be $40 million. Under the BAT, however, the costs incurred by the retailer would be disallowed. Instead of paying a tax on profits of $50 million, the U.S. retailer would owe a 20% BAT on gross sales of $100 million. The $20 million tax would therefore reduce the U.S. retailer's after-tax profit from $40 million to $30 million.

In the reverse situation, no tax would apply. For example, suppose a U.S. manufacturer produces widgets at a cost of $50 million and sells the widgets to a Canadian retailer for $100 million. Instead of owing tax, the U.S. manufacturer would recognize a tax loss of $50 million, based on its costs. Presumably this tax loss could be applied to reduce the amount of taxable income resulting from sales of widgets to U.S. retailers.

Not surprisingly, U.S. importers—such as major U.S. retailers and oil refiners—oppose the tax. But in the view of many economists, U.S. importers should be indifferent. According to economic theory, the BAT should cause the U.S. dollar to increase in value, thereby increasing the purchasing power of U.S. importers.

For example, in the scenario described above, some economists predict a 25% increase in the value of the U.S. dollar. In such case, the U.S. retailer would pay only $40 million (instead of $50 million) for the Canadian widgets that it resells to U.S. consumers for $100 million. The BAT would remain $20 million (20% of gross sales of $100 million). The U.S. retailer's after-tax profit, however, would now be $40 million (gross sales of $100 million, less costs of $40 million and tax of $20 million). This is the same after-tax profit realized in the absence of the BAT. The appreciation in the U.S. dollar would therefore shield the U.S. importer from economic harm.

Economic theory also indicates that U.S. exporters should avoid economic harm. At least in theory, by paying tax at lower rates, U.S. exporters should be able to sell goods and services to non-U.S. buyers at reduced prices. The reduced prices would therefore offset the reduced purchasing power of non-U.S. buyers resulting from the appreciation in the U.S. dollar.

The BAT could have far-flung consequences. Conceivably, the BAT has the potential to turn the U.S. into a tax haven. Companies based in countries with high labor costs, such as Canada, might be pressured to move production and services to the United States—just to remain competitive. U.S.-based technology companies might be induced to move offshored intellectual property back into the United States. U.S. retailers could struggle, particularly if U.S. consumers are able to make on-line purchases directly from non-U.S. retailers free of the BAT. As an additional complication, prices could change in unexpected ways.

The possibility of cascading effects makes it close to impossible for multinational companies to accurately model the impact of the BAT on their businesses. Compounding the problem, the BAT exists only in a conceptual Republican "blueprint." Although the tax has been promoted as a chief revenue-raiser underpinning U.S. tax reform, legislation giving effect to the BAT has yet to be proposed.

What happens next? For now, it seems unlikely for any version of the BAT to be enacted before the end of 2017. In addressing U.S. tax reform, lawmakers face challenges on all fronts. The cost of government is expected to increase: expensive social programs such as Medicare and Social Security have the strong support of the President's political base, and the President himself has vowed to substantially increase spending on national defense and infrastructure. At the same time, Republican legislators strongly oppose increases in personal income tax rates.

The BAT offers the tantalizing prospect of solving at least part of the revenue puzzle. But the complexity of the BAT, the long Presidential transition period, and intense lobbying campaigns by U.S. importers, in combination, seem likely to fatally wound the pure version of the BAT—at least as the tax originally was proposed in June of 2016.

Consequently, the chief virtue of the BAT may be that it leads U.S. tax reformers to search further afield for answers. Unlike the United States, most other countries tax only "home grown" profits through a "territorial" tax system. Most countries also impose a value-added tax (VAT). Such approaches typically have received little consideration from U.S. lawmakers in the past. But to the extent that legislative wrangling with the BAT upsets the status quo, U.S. tax reformers may finally begin to look to other countries for solutions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.